Del Taco Restaurants, Inc. Reports Fiscal First Quarter 2018 Financial Results

Del Taco Restaurants, Inc., (NASDAQ:TACO), the second largest Mexican-American QSR chain by units in the United States, last week reported fiscal first quarter 2018 financial results. The Company also reaffirmed guidance for fiscal year 2018.

Fiscal First Quarter 2018 Highlights

• System-wide comparable restaurant sales growth of 3.7%, marking the 18th consecutive quarter of gains;
  • Company-operated comparable restaurant sales growth of 2.6%, marking the 23rd consecutive quarter of gains. Company-operated comparable restaurant sales growth was comprised of average check growth of 2.6%, including slightly positive mix growth, and flat transactions;
  • Franchised comparable restaurant sales growth of 5.2%;
• Total revenue increased 6.8% to $112.6 million (including $2.9 million of franchise advertising contributions and $0.2 million of other franchise revenue required as part of the new revenue recognition rules adopted in the first fiscal quarter whereby the offsetting impact is an increase to expenses such that there is no impact on operating income and net income) compared to $105.3 million in the fiscal first quarter 2017;
• Company restaurant sales increased 3.8% to $105.1 million compared to $101.2 million in the fiscal first quarter 2017;
• Net income decreased to $3.2 million, representing diluted earnings per share of $0.08, compared to $4.2 million in the fiscal first quarter 2017, representing diluted earnings per share of $0.10;
• Restaurant contribution* margin of 18.4% compared to 19.1% in the fiscal first quarter 2017;
• Adjusted EBITDA* of $13.9 million compared to $14.6 million in the fiscal first quarter 2017; and
• Three company-operated restaurant openings and one franchised restaurant closure.

John D. Cappasola, Jr., President and Chief Executive Officer of Del Taco, commented, “Restaurant results were generally in-line with our expectations and we are pleased to reaffirm our guidance for the year. System-wide comparable restaurant sales growth of 3.7%, or 7.9% on a two-year basis, was a strong outcome, and we view the franchise restaurants 5.2% comparable restaurant sales increase as a reflection of Del Taco’s strength in varied geographies. We are very pleased with the continued AUV growth within our franchise base which is driving increased traction on franchise development across the country.”

Cappasola continued, “We began the second quarter with a successful ‘2 For $5’ promotion allowing guests to ‘mix and match’ our popular Classic Burritos, and recently launched our fan-favorite Carnitas protein as a limited time offering. A favorable guest response to these offerings has helped drive positive second quarter system-wide comparable restaurant sales through the first five weeks as we lap over our most difficult prior year comparisons of over 8% for company and franchise restaurants during the same five weeks, resulting in very strong two-year trends.”

Cappasola concluded, “We view our first quarter restaurant contribution margin as a good outcome considering we had our lowest expected level of menu pricing coupled with the highest level of expected food inflation for the year. As the year progresses we expect to increase our menu pricing while food inflation trends moderate and various supply chain and labor optimization strategies generate additional savings. We believe these factors, coupled with our upcoming launch of Elevated Combined Solutions with enhanced marketing and advertising, menu innovation and operational initiatives, has us well positioned to drive improved restaurant contribution performance in the second half of the year and beyond.”

Review of Fiscal First Quarter 2018 Financial Results

Total revenue increased 6.8% to $112.6 million (including $2.9 million of franchise advertising contributions and $0.2 million of other franchise revenue required as part of the new revenue recognition rules adopted in the first fiscal quarter whereby the offsetting impact is an increase to expenses such that there is no impact on operating income and net income) compared to $105.3 million in the fiscal first quarter 2017. Excluding these revenue recognition impacts total revenue increased 3.9%.

Comparable restaurant sales increased 3.7% system-wide for the fiscal first quarter 2018, resulting in a 7.9% increase on a two-year basis. The Del Taco system has now generated comparable restaurant sales growth for 18 consecutive quarters. Company-operated comparable restaurant sales increased 2.6%, marking 23 consecutive quarters of comparable restaurant sales growth. Franchise comparable restaurant sales increased 5.2%.

Net income was $3.2 million, representing $0.08 per diluted share, compared to $4.2 million in the fiscal first quarter 2017, representing $0.10 per diluted share.

Restaurant contribution* was $19.3 million compared to $19.4 million in the fiscal first quarter 2017. As a percentage of Company restaurant sales, restaurant contribution* margin decreased approximately 70 basis points year-over-year to 18.4%. The decrease was the result of an approximate 30 basis point increase in labor and related expenses and an approximate 40 basis point increase in occupancy and other operating expenses, of which half was related to the timing of advertising expenses.

Adjusted EBITDA* was $13.9 million compared to $14.6 million in the previous year’s fiscal first quarter.

Restaurant Portfolio

During the fiscal first quarter 2018, Del Taco opened three company-operated restaurants and one franchised restaurant was closed.

Repurchase Program for Common Stock and Warrants

During the fiscal first quarter 2018, the Company repurchased 9,811 warrants at an average price per warrant of $3.37. At the end of the fiscal first quarter approximately $20.9 million remained under our $50 million repurchase authorization.

Fiscal Year 2018 Guidance

The Company is reiterating the following guidance for fiscal year 2018, the 52-week period ending January 1, 2019:

• System-wide same store sales growth of approximately 2% to 4%;
• Total revenue between $506 million and $516 million, reflecting the new revenue recognition rules whereby franchise advertising contributions and other franchise revenue, which totaled $12.7 million and $0.8 million in fiscal year 2017, respectively, will now be reported on a gross basis. This guidance also includes an estimated $0.5 million unfavorable impact from the timing of initial franchise fees and renewal fees which must be deferred and recognized over the term of the related franchise agreement;
• Total company-operated restaurant sales between $473 million and $483 million;
• Restaurant contribution margin between 19.3% and 19.8%;
• General and administrative expenses between approximately 8.2% and 8.5% of total revenue, including the expense side of the other franchise revenue that will now be reported on a gross basis;
• Effective tax rate of approximately 26.5% to 27.5%;
• Diluted earnings per share of approximately $0.59 to $0.63;
• Adjusted EBITDA between $71.5 million and $74.0 million;
• 25 to 28 new system-wide restaurant openings; and
• Net capital expenditures between $35.0 million to $38.0 million.

We have not reconciled guidance for Adjusted EBITDA to the corresponding GAAP financial measure because we do not provide guidance for the various reconciling items. We are unable to provide guidance for these reconciling items because we cannot determine their probable significance, as certain items are outside of our control and cannot be reasonably predicted since these items could vary significantly from period to period. Accordingly, a reconciliation to the corresponding GAAP financial measure is not available without unreasonable effort.

Key Financial Definitions

Comparable restaurant sales growth reflects the change in year-over-year sales for the comparable company, franchise and total system restaurant base. Restaurants are included in the comparable store base in the accounting period following its 18^th full month of operations and excludes restaurant closures.

Restaurant contribution* is defined as company restaurant sales less restaurant operating expenses, which are food and paper costs, labor and related expenses and occupancy and other operating expenses. Restaurant contribution margin is defined as restaurant contribution as a percentage of company restaurant sales. Restaurant contribution and restaurant contribution margin are neither required by, nor presented in accordance with, GAAP. Restaurant contribution and restaurant contribution margin are supplemental measures of operating performance of restaurants and the calculations thereof may not be comparable to those reported by other companies. Restaurant contribution and restaurant contribution margin have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of results as reported under U.S. GAAP. Management believes that restaurant contribution and restaurant contribution margin are important tools for investors because they are widely-used metrics within the restaurant industry to evaluate restaurant-level productivity, efficiency and performance. Management uses restaurant contribution and restaurant contribution margin as key performance indicators to evaluate the profitability of incremental sales at Del Taco restaurants, to evaluate restaurant performance across periods and to evaluate restaurant financial performance compared with competitors.

Adjusted EBITDA* is defined as net income/loss prior to interest expense, income taxes, and depreciation and amortization, as adjusted to add back certain charges, such as stock-based compensation expense and transaction-related costs, as these expenses are not considered an indicator of ongoing company performance. Adjusted EBITDA is a non-GAAP financial measure and should not be considered as an alternative to operating income or net income/loss as a measure of operating performance or cash flows or as measures of liquidity. Non-GAAP financial measures are not necessarily calculated the same way by different companies and should not be considered a substitute for or superior to GAAP results. We believe Adjusted EBITDA facilitates operating performance comparisons from period to period by isolating the effects of some items that vary from period to period without any correlation to core operating performance or that vary widely among similar companies. These potential differences may be caused by variations in capital structures (affecting interest expense), tax positions (such as the impact on periods or changes in effective tax rates or net operating losses) and the age and book depreciation of facilities and equipment (affecting relative depreciation expense). We also present Adjusted EBITDA because (i) we believe this measure is frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry and (ii) we use Adjusted EBITDA internally as a benchmark to compare performance to that of competitors.

About Del Taco Restaurants, Inc.

Del Taco (NASDAQ:TACO) offers a unique variety of both Mexican and American favorites such as burritos and fries, prepared fresh in every restaurant's working kitchen with the value and convenience of a drive-thru. Del Taco's menu items taste better because they are made with quality ingredients like fresh grilled chicken and carne asada steak, hand-sliced avocado, hand-grated cheddar cheese, slow-cooked beans made from scratch, and new creamy Queso Blanco. The brand's UnFreshing Believable® campaign further communicates Del Taco's commitment to provide guests with the best quality and value for their money. Founded in 1964, today Del Taco serves more than three million guests each week at its more than 560 restaurants across 14 states.